Large businesses engaged in uncertain tax treatments may soon be required to make more disclosures and reveal to HMRC further tax arrangements under a new government plan.
The main objective of this proposal is to reduce the so-called tax gap, which represents the difference between the amount of tax expected to be paid to the UK tax authority and the amount that is ultimately collected.
Companies, partnerships and corporate groups with an annual turnover of over £200m or a balance sheet total of over £2bn must already disclose any tax treatment within the scope of the existing legislation that either led to the recognition of a provision in the accounts or where the treatment is not in accordance with the way in which it is known that HMRC would interpret or apply the law.
Now the government intends to go further and expand the disclosure requirements to situations where there is more than one credible legal interpretation and, crucially, HMRC’s view is not known.
This will almost certainly increase the number of disclosures to be made to HMRC
Key impact
In essence, if this change is implemented, large businesses will need to notify HMRC not only when they are aware that HMRC would disagree with them, but also in circumstances where published guidance, statements, other official material or communications by HMRC do not indicate that the interpretation chosen by a business to support an advantageous tax treatment will be acceptable to the tax authority.
This will almost certainly increase the number of disclosures to be made to HMRC. For context, under the current version of the legislation, only 30 notifications have been submitted between 2022 and 2025, involving a potential tax at risk of about £1bn, according to HMRC’s data.
Wider reform will expand the number of taxes in scope
Given the potential impact on affected taxpayers, the UK government has launched a consultation on the wider reform, which will remain open until 4 June as the intended changes to the existing legislation go beyond the additional notification requirements and, among other things, expand the number of taxes in scope.
At present, the notification of uncertain tax treatment for large businesses regime applies only to corporation tax, value added tax (VAT) and income tax (including PAYE). Going forward, the government aims to extend the business taxes in scope to stamp duty land tax, national insurance contributions (NICs) and payments under the Construction Industry Scheme.
With regards to NICs, it is worth clarifying that these tax contributions are already in scope, but only for the purpose of calculating the total reportable tax advantage in relation to income tax uncertainties.
Furthermore, since the government is proposing to bring trusts and individuals within scope of the regime, too, inheritance tax and capital gains tax may also become taxes in scope.
What is not expected to change is the threshold of £5m in tax benefits for the taxpayer that would trigger a notification when the limit, per tax, is breached during any relevant period.
Currently, different taxes have different relevant periods: for example, for corporation tax it is the financial year that the relevant return relates to, while the relevant period for VAT and PAYE ends on the last day of the last return period falling wholly within the related financial year. This ultimately means that the timing of the notification depends on which tax (or taxes) the underlying arrangement relates to.
A relatively quick turnaround would allow the government to go live sooner rather than later
Here, the proposal, which is also subject to consultation, is to introduce a new single annual date for all notifications, regardless of the tax (or taxes) in question.
Quick turnaround
The government’s aim is to publish its response to the public consultation by the end of the summer. The intention is that any legislation will be introduced in the next available Finance Bill and will apply to returns filed after 1 April the following year.
A relatively quick turnaround would allow the UK government to go live with any new measures sooner rather than later, with a view to reducing the existing tax gap as soon as possible.
The latest publicly available figures show that the total tax gap in the UK is estimated to be in the region of £47bn, while the legal interpretation portion of the gap (which a reform of the uncertain tax treatment regime is meant to close or reduce significantly) was £5.4bn in the 2023/24 tax year.
One final note about the exemption from notifying, which currently exists, as explained in the open consultation notice: ‘if it is reasonable for the taxpayer to conclude that HMRC already have available to them all, or substantially all, of the information relating to that amount that would have been included in the notification if it had been required to be given’. The government proposes to tighten this exemption by requiring that any taxpayer holds confirmation from HMRC that the uncertainty has been brought to their attention.
